Ask the Money Lady: How to pay less at tax time

 In Opinion

Dear Money Lady,

When do I have to file my taxes this year and how can I pay less. I am retired now and every penny counts.

Thanks, Janice.

 

Dear Janice,

The due date is Monday, May 2 to file your tax return with the CRA.

You are not alone, Janice.

Many wonder how they can earn more and pay less tax to make ends meet every month. It is not your gross income that counts, it is your take-home income or after-tax income that is most important. Yes, it is wonderful for those to say they have an impressive six-figure income; however, how much of that income are you paying out in Canadian income tax, not to mention all the taxes we pay on our basic cost of living. I must admit that managing your taxes during your working years is relatively generic. You should maximize your RRSP contributions, purchase investments that attract the least tax possible on future investment income and if you can, you should buy real estate to increase your net worth. Some even invest in rental properties to build additional wealth and use the ongoing expenses as a tax write-off to lower their marginal tax rate.

When you transition into retirement Janice, your tax planning process will shift into withdrawing assets, and you should try to do so in the most tax-efficient manner. To succeed in achieving tax efficiency in retirement, Canadians may need to make a minor “mind shift” here.

Most are preoccupied with minimizing current taxes each year; however, this cannot be at the expense of your long-term objective for maximizing after tax income for your entire retirement, (often estimated at 25-40 years). Retirees need to have a goodunderstanding of how various income sources are taxed. Decisions need to be made on how to properly allocate investments with a keen awareness of tax brackets and thresholds for future tax credits. Rising life expectancies, market volatilities, progressiveinflation and of course, the unplanned expenses we never thought of; all pose serious threats on the ability of a retiree to manage their finances to last their lifetime. So, let’s look at ways we can increase your after-tax income in retirement.

There are three main types of taxation to consider: interest income, dividend income, and capital gains. All are taxed differently, so this makes it easier to structure your portfolio more efficiently when you are creating your plan with your advisor. As a general rule, you want to place income that is going to be unfavourably taxed, (interest income) into tax sheltered products such as TFSAs or RRSPs. Investment income that generates returns that receive more favourable tax treatments, (dividends or capital gains) should be placed in non-registered accounts.

The next rule is to take advantage of government pensions and count them in first when estimating your annual withdrawals for your yearly income. We want to avoid claw-backs as much as possible, so it is imperative that you have a good understanding of your company pension, government allowances, and any anticipated investment income withdrawals you plan on each year. Other ways to initiate good tax planning opportunities would be to utilize CPP/QPP pension sharing with a spouse or common-law partner if possible. You can also split employer pension plans and registered plans with a lower-income spouse or common-law partner to reduce your marginal tax rates. Remember that with any registered plans; RRSP, LIRA or LIFs, you should try to hold them to their latest maturity,(example age 71). Once registered funds are converted into a RRIF or LRIF, the prescribed annual minimum withdrawal requirement will ensure that you have income to report every year.

Tax efficiency in retirement should not be overlooked and should be something you regularly discuss with your advisor. Simply put, paying less tax translates into keeping more money in your pocket, allowing you to enjoy a better quality of life with less overall investment and lifestyle risk.

Christine Ibbotson is a national radio host and author of three finance books plus the Canadian Best-Selling Book “How to Retire Debt Free & Wealthy.” Visit www.askthemoneylady. ca or send a question to info@askthemoneylady. ca.

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